Anatomy of a cryptocurrency: What more does Bitcoin need to do

When you think of the word “crypto,” the word that comes to your mind is exactly what comes to everyone’s mind – Bitcoin. The first cryptocurrency, the first blockchain to facilitate transactions of digital assets, the first step towards the end of centralization.

Bitcoin bestowed upon the world not only a new instrument of transaction, but also an entirely new system of finance. One where you don’t have to worry about who’s watching.

Alas, 12 years later, with over 6500 cryptocurrencies in existence now, the pressure to keep up is building on the king coin. Hundreds of blockchains have been built by now, striving to do something that Bitcoin couldn’t, to try and overthrow it.

Some succeeded, some failed, but in that process, they developed the first real threat to Bitcoin – Decentralized Finance, otherwise known as DeFi.

Today Bitcoin needs DeFi more than DeFi needs Bitcoin.

What’s DeFi and why the need for it?

I’m sure you all smart fellows are mostly already aware of DeFi, but a quick revision will help make things clear for the points we’ll be discussing ahead.

DeFi is the exact opposite of the kind of finance we witness every day. No humans at the helm, no control over operations, and no interference whatsoever.

DeFi is a system that enables any kind of transaction between two individuals utilizing a smart contract which is basically a pre-defined set of agreements that every transaction must satisfy in order for it to be processed. 

So, why does it matter you ask? Because that DeFi is the biggest demand and the most necessary feature of today’s crypto-space. Since it removes the hassle of human dependence and error, everyone wants to integrate it.  The demand has been coming from banks and individual investors alike who want digital assets and DeFi to be a part of their system as soon as possible. 

As popular programmer Chris Dixon said,

“On Wall Street, value flows inward to institutions at the center. In DeFi, value flows outward to people at the edges.”

A survey conducted by Deloitte Insights recently found that a huge chunk of Financial Stability Institute (FSI) members believe that digital assets will be very important to their industry in the next 2 years. Even though their degree of need for multiple functions varied, the main focus was on access to DeFi platforms as well as new payment methods.

FSI survey for use of DeFi | Source: Deloitte

In fact, the oldest and the biggest Thailand bank – Siam Commercial Bank – has been supporting the growth of DeFi in Asia using a $110 million war chest for investments.

While regulations will always be a hindrance in the path of absolute DeFi adoption, it doesn’t stop the idea. Currently, 55 of the top 100 banks in the world are investing in digital assets.

On the other hand, the total value locked on DeFi across all chains is over $170 billion. So, even if theoretically, the top 100 banks invested 1% of their assets under management, the combined TVL would hike above $1 trillion.

DeFi TVL if top banks added 1% of their AUM | Source: Blockdata

This is the potential DeFi holds with the involvement of banks and institutions. This is how DeFi will transform the crypto-space entirely. This brings us to the question…

How are others banking on this opportunity?

Recently, Binance pointed out the growth some major altcoins have registered since the beginning of 2021. BTC has grown by only 63% whereas, in the same period, ETH, ADA, BNB, and SOL have risen by 374%,1252%, 969%, and 7359%, respectively.

Bitcoin vs altcoins’ growth in 2021 | Source: Binance

The only thing common between these gainers is – DeFi. It began with Ethereum, but the emergence of Binance Smart Chain, Solana, Fantom, and the Alonzo hard fork for Cardano has made DeFi the next big thing. Today, combined, they hold almost $144.5 billion in TVL.

This has attracted investors towards them and away from Bitcoin.

Bitcoin has not seen any growth in investors for the last 6 months now.

Bitcoin’s stagnant address growth | Source: Intotheblock – AMBCrypto

But, Bitcoin will always be the prime SOV asset… right?

Bitcoin lacks in the field of DeFi since all it has to offer is being an SOV. The network is slow, it doesn’t support smart contracts, and now even that exclusivity of SOV is being challenged. While no other coin is competing here, the rise of a relatively newer “asset” definitely is – NFTs. 

The emergence of NFTs has made them a competitor for that label as we witnessed some major inflows into NFTs this year. 

At the beginning of 2021, the NFT space had only 373k users. However, in the last 9 months, the same user base has grown to 1.8 million. Total volumes in the space have risen from $71 million to $8 billion through these months. Over $4.7 billion worth of transactions took place in August alone. 

NFT volumes in 1 year | Source: Dune – AMBCrypto

But, how does it compare to Bitcoin’s SOV status is what you’re thinking, right? Let me explain.

Before wider adoption, Bitcoin’s price was based on the factor of scarcity and demand. 4-5 years ago, it was in some senses, illiquid. Even so, people bought it still.

Today, the same assets are of real value and hold a liquid status. The same is the case for NFTs, priced on the basis of demand, and their scarcity makes everyone want to hold one.

But, that does not mean that they will absolutely eradicate the demand or need for Bitcoin. NFTs could definitely flourish over the next few years, but their adoption is nowhere near Bitcoin’s.

NFTs’ high prices create a lack of accessibility for an average user. This helps in making Bitcoin’s case stronger.

However again, at one point in history, no one would have thought that a digital asset named Bitcoin would be compared to the likes of Gold in terms of investment. And today, that discussion is in favor of Bitcoin owing to 100x higher returns and the promotion of decentralization.

This is how NFTs have the potential to reach the status of an SOV. Years from now, their value could be at par, or maybe even higher than it is today. Just like we are confident about BTC being valued at levels much higher in the future. 

However, the lack of DeFi and NFT functionality on Bitcoin will be the biggest stumbling block for the king coin and also the reason behind the rise of other chains and tokens.

Bitcoin – No longer the king coin?

Yes, Bitcoin will still be the king coin. It still has the highest number of users and inflows and it still has the highest market cap. The question is – For how long? 

Since the beginning of this year, Bitcoin’s dominance has fallen from 71% to 41% as more and more competitive altcoins and blockchains emerged. The Lightning Network (LN) can support faster transactions, but its smart contract functionality is limited to merely conducting transactions.

On top of that, LN only considers the channels whose average capacity exceeds $1000 as viable for daily commerce. Anything around or under $100 or $10 is not. This doesn’t help the case of daily use cases as not everyone is capable of conducting transactions of such huge values regularly. 

LN’s network capacity | Source: CoinDesk

While Bitcoin is presently the primary choice for smaller businesses looking to adopt crypto-transactions, the emergence of altcoins that are lesser expensive and blockchains that are designed specifically for the purpose of everyday transactions could take that away as well.

Cardano, XRP, Algorand are some examples of altcoins under $3, supporting almost 250 to 1500 transactions per second. They have emerged to be ideal for daily commerce.

However, in the long run, as crypto-adoption increases, demand for more use cases will increase as well. And, if Bitcoin fails there, others might overtake it. It may not happen in the immediate future, but it certainly could happen. Here, the operative word being could.